Chinese Authorities Investigating Fraudulent Reports

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New York, NY – Silvercorp Metals, Inc., a Vancouver-based company with mining operations in China, has decided to fight back against accusations from short sellers of accounting fraud.  Last week, this battle intensified as Chinese law enforcement officials have opened a criminal investigation into anonymous parties including IFRA, Alfred Little and others for creating “false and fraudulent reports” attacking Silvercorp Metals Inc. and its Chinese subsidiaries.


Criminal Investigation Launched

Silvercorp is the largest primary silver producer in China with four silver-lead-zinc mines at the Ying mining camp in Henan Province.  The company is based in Vancouver, Canada and trades on the Toronto and New York Stock Exchanges under the ticker SVM.

Last week, Silvercorp announced that Chinese investigators have opened a criminal case against the numerous creators of “false and fraudulent reports” attacking Silvercorp Metals Inc., including IFRA, Alfred Little and others.

The company has been told not to disclose too much about the investigation.  Silvercorp’s chairman and CEO, Rui Feng explained, “I cannot tell you exactly where it is,” but “it is more than one police department,” he said.  “They asked us to provide all the information we have collected, which we did.”

A potentially interesting aspect to this case was mentioned in Silvercorp’s Press Release announcing the criminal investigation.  Silvercorp alleges that in November it had received a number of calls from hedge funds, including one call from an expert network – Guidepoint Global – trying to find a mining engineer who worked for the firm who would speak to a hedge fund manager.  The Press Release suggests that the engineer was offered a bribe to “attain insider information on Silvercorp for trading”.

Click here to read Silvercorp’s Press Release in its entirety.


Background on the SVM Case

The criminal investigation is just the latest phase of an ongoing battle between Silvercorp and a group of short sellers.  On August 29th, 2011 an anonymous letter was sent to the Ontario Securities Commission, Silvercorp’s auditors and various media outlets accused the company of a $1.3-billion accounting fraud.

In early September, the short sellers argued in anonymously authored reports published on Alfredlittle.com that Silvercorp must be overstating its earnings by at least five times based on the financial statements filed by a joint-venture partner.  In addition, these reports called into question Silvercorp’s mining operations and asset transactions.  The accusations prompted a sharp selloff in SVM.

Later that month, Silvercorp brought a lawsuit in the New York County Supreme Court against “Chinastockwatch.com, Jerry Katz, Alfredlittle.com, Alfred Little, Simon Moore, and several ‘John Doe’ defendants for spreading ‘false, defamatory and fraudulent’ information about Silvercorp on the Internet and in letters to the media and regulators”.  Two separate legal actions have been brought in this matter in British Columbia.

In October, Silvercorp reported that the results of an investigation conducted by KPMG Forensic Inc. – hired by Silvercorp’s board – found that the revenue reported in the financial statements filed with the United States Securities and Exchange Commission was “substantially correct”.  In addition, KPMG found that its statements on cash and cash equivalents were accurate.


Summary

The Silvercorp case is the latest example of a company with Chinese operations being charged with accounting fraud by short sellers who published their findings in a research report.  Earlier this year, Muddy Waters accused Sino Forest of overstating its revenues and running “a massive Ponzi scheme”.  While the Toronto-listed company is fighting the allegations, the firm’s share price plunged more than 70%, and it has ceased trading on the TSX.

The big difference between the Sino Forest and Silvercorp cases is the aggressiveness with which the management of the companies responded.  In the Sino Forest case, they took over five months to hire an independent committee to investigate the charges and release its report in favor of the company.  This took Silvercorp a little over one month.  In addition, Silvercorp brought multiple lawsuits against the short sellers who published the reports within a very short period.

While it remains to be seen whether the accusations against Sino Forest or Silvercorp are accurate, it is clear to us that public companies need to respond quickly and decisively when they are attacked so openly by short sellers.

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